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Price-to Book (P/B) - Useful tool for long-term investors (like myself)

September 23, 2009 – Comments (0) | RELATED TICKERS: PVR , PSEC , KAZ

I have taken some money of the table in recent weeks to lock in some profits & to have some cash on hand in case the market was to have a correction back to 8500-9000 on the DOW by the end of the year or early Q1 2010.

But at the same time it's useless to trade against the direction of the market and for now it still seems we are still in a rising trend. If the DOW were to punch though 10.000 this rally could have some more steam, supported by decent worldwide Q3 GDP figures and some recovery in corporate earnings especially compared to last years Q3, which was horrible.

No matter the market conditions I have found that price-to-book is an extremely handy tool for long term investing. There are still many decent companies with price-to-book of 1 or even less, paying dividends, good business plans and very important good growth numbers and potential, etc.

Although P/B is less useful with financial companies, I'd rather buy shares in a decent company at P/B less then 1, with more shareholder equity per share then what I'm paying at the time, then a company with many multiples.

It's a good way to initially search out companies, but it's far more difficult and time consuming to find the 10-20 stocks within those 1000 initial hits that are actually good companies with good long term investment potential. Most of the companies in My Caps, which I am also invested in among others, fit this catagory.

But then not everyone necessarily agrees otherwise it would not be possible to buy these companies at these prices to book, so perhaps my approach is incorrect. But then time will tell and that's also why I'm currently only 60% invested at these levels and have 40% cash waiting on the sidelines. Best to cover all the bases. The story with the dollar declining and its effect on the USD denominated commodities will have a large impact on in which markets and sectors best to invest in.